Accredited by:
enterprise investment market
Industry Update
QUARTER 4 2020
what's in store after covid knowledge intensive funds WHAT THE MANAGERS think recent performance
FIND INSIDE
INTRODUCTION
1
MARKET UPDATE
2
industry analysis
4
considerations for investment
3
MANAGERS IN FOCUS
5
WHAT'S ON THE HORIZON
6
FURTHER LEARNING
7
The latest news, updates and statistics on EIS
Sponsored by:
1. Introduction
Foreword Opening statement Update overview Key findings
1. INTRODUCTION
EISA on fee transparency Coronavirus dominates headlines Government schemes for SMEs FCA pauses 10% drop rule What the managers say
2. market update
EIS stats SEIS stats Knowledge intensive funds
4. INdustry analysis
Market composition Fees and charges
3. considerations for investment
Blackfinch Deepbridge Guinness Octopus Investments Oxford Capital Comparison table Showcase video content
5. managers in focus
What's in store after Covid The Brexit endgame OTS review What the managers say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership
7. further learning
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
guy tolhurst
foreword
MENU
Foreword
INTRODUCTION / FOREWORD
I
t gives me great pleasure to introduce our latest EIS Update, bringing you the latest updates, analysis and metrics on the Enterprise Investment Scheme. Our previous Update was written at a time when Covid had only recently hit and now - several months later - it continues to dominate the headlines, regularly pushing all other news out of the public eye. The late February, early March collapse of share prices has been followed by a so-called ‘V shape’ recovery for some industries, while others continue to struggle in a world of increased restrictions for the public. This imbalance has broadly been along sector lines - with technology companies generally performing much better than hospitality. A number of companies have seen exponential growth over the past year, and even more well managed businesses have managed to adapt and thrive during the various states of lockdown. At the same time, the Government has made a number of loans and financial schemes available to SMEs - including the types that would typically raise funds through EIS and even SEIS. Of course the current climate is challenging for businesses, and especially those without large capital reserves or debt facilities to fall back on. But with careful selection, and with many managers offering their investee companies additional expertise, there continue to be opportunities out there for shrewd stock pickers. The Government has spent big to try and keep the economy going during Covid, and the Chancellor, Rishi Sunak, has made clear he intends to balance the books - so he may well be casting his eye towards the various tax perks on offer in the future. That said, EIS and SEIS are recognised success stories, so there are perhaps more obvious targets for Sunak to look at when deciding where to raise funds. Of course Covid-19 and the Government’s response is not the only thing that has happened over 2020. Brexit negotiations continue to grumble on in the background, with time rapidly running out to reach a final agreement. Any change to state-aid rules could impact the type and number of companies able to receive EIS investments. The year also saw new rules brought in for knowledge intensive funds. Arguably these are yet to receive the attention they deserve (something else has been hogging the headlines through 2020), but without a doubt, these are an important development in the evolution of the tax incentive. All in all, these are interesting times for EIS investors. The current situation has made due diligence more important than ever before. But with diversification and the longer term nature of EIS able to smooth out some of the rough, and opportunities remaining, it remains a viable consideration for those looking at tax efficient investments. In fact, it could have an important role to play in driving funds to power the growth journeys of today’s SMEs to help them become the giants of tomorrow that the UK economy so desparately needs.
managing director, intelligent partnership
welcome
MARK BROWNRIDGE
opening statement
In a Covid world, EIS is more important than ever
INTRODUCTION / OPENING STATEMENT
A
s coronavirus continues to dominate almost every aspect of our lives, the stark realisation of the economic impact of the coronavirus epidemic is being laid out vividly before us. The graphs we usually use to assess economic performance look as though someone’s hand has slipped. They gently undulate through the past two decades, rising and falling as the economy grew and contracted. Then, when they reach March 2020, they fall vertically, as though off a cliff. The number of people claiming benefit has risen by 23%, GDP is down 20%, and UK public debt is now larger than the size of the UK economy. All hopes of a V shaped recovery seem to have dissipated and we still face huge uncertainty about when all this will finally end. Oh, and you can throw in the still unresolved Brexit situation just for good measure. Two words sum things up. Doom and Gloom. For startups and scaleups, the funding situation is dire. Positively, there is much appreciation of the role the UK’s startups and scaleups can play in reigniting growth in the UK amongst Government and Westminster and perhaps this will spark a renewed and sustained interest in supporting the UK’s SMEs.
Fund managers play an important role in developing the CEO’s and innovators in these businesses, many of whom have a great idea, product or concept but no experience or inkling as to how to market or commercialise these.
Last year, AIM accounted for 60% of all European growth market IPO and follow-on equity capital raised. While IPOs often get greater attention, it’s worth noting that in 2019 AIM companies raised £3.4bn in 351 follow-on issuances. This underlines the essential function of public markets to enable companies to return to market to raise additional capital, as needed, to continue to grow, innovate, create jobs and support economic development. London Stock Exchange also launched two innovations in 2019, which will support AIM companies and the investor community. In November, we announced a collaboration with Primary Bid to broaden retail investors’ access to IPOs and follow-on equity raisings. Through the collaboration, retail investors will be able to access capital raisings on the same terms as institutional investors. And in October, London Stock Exchange launched the Green Economy Mark, shining a spotlight on listed companies and funds on the Main Market and AIM that derive 50% or more of their revenues from products and services contributing to the global green economy. There are currently 78 companies that have received the Mark, 38 of which are admitted to AIM. In the short-term global stock markets are likely to remain volatile as countries around the world navigate their responses to the pandemic. However, there is much to celebrate about AIM and the dynamic companies it supports. As the world’s leading growth market, AIM plays a key role in supporting UK and international companies, providing access to growth and opportunities for investors and connecting issuers with the capital they need to drive innovation, economic growth and job creation.
director general eisa
We do feel there is momentum behind the EIS and SEIS cause and expect to see a number of measures aimed at growth capital introduced either early in 2021 or at the Budget in March. But let’s rewind a minute and get a temperature check as to where the EIS and SEIS industry currently stands. Firstly, the usual end of tax year fundraising season in March and April took a massive hit from the first lockdown. This is normally the biggest fundraising time of the year for EIS and SEIS investments, so for Covid19 to hit then had a devastating effect on fundraising with investors seemingly taking risk off the table and not prepared to invest at such an uncertain time.
EIS and SEIS fund managers report that their fundraising fell by as much as 60-80% of what they were expecting. The unfortunate domino effect of this has unfortunately fallen on the startup and scale up businesses that fund managers had identified for investment with many being left with either severely cut allocations or none at all. As we begin to focus in on the 2021 tax year end, we are starting to see an uptick in interest from planners and advisers and it seems as if clients are coming back to the risk table and taking tentative investment steps. This is to be welcomed as one of the side effects of Covid19 is that it has created plenty of demand for equity funding from companies as well as lower valuation points so there are a number of exciting companies available for investment at great value. Many of these companies have been the first responders to the pandemic. With the guidance and support of their fund managers, entrepreneurs and innovators have transformed and pivoted their businesses to help. Beermakers and distilleries have shifted production to hand sanitizers. 3D printers have been used to create the valves used in ventilators. Those just-in-time valves are saving lives. When we look back on the current health crisis, there’s no doubt that we’ll learn that it resulted in a number of innovations: new drugs and medical devices, improved healthcare processes and manufacturing and tech breakthroughs. This is why EIS and SEIS investment is so important in providing smart, seed capital for these innovations. Fund managers play an important role in developing the CEO’s and innovators in these businesses, many of whom have a great idea, product or concept but no experience or inkling as to how to market or commercialise these. For anyone holding off investing, now is a great time as many of these companies still require investment and investors have the chance to get an equity stake in these companies at an early stage of the development which could stand them in good stead in the future. As always though, diversification is the key. So, there is much to be hopeful for in the EIS and SEIS world despite the wider health situation. After the financial crisis of 2008, many now successful companies started in reaction to being displaced by the crisis, innovated and flourished. Famous names include WhatsApp, Groupon and Uber. Those opportunities exist now so do your research and go and find them! Finally, it’s our role at EISA is to ensure the schemes are functioning as they should and are supporting both investors and businesses, particularly at times like these. In our conversations with Government, we are confident EIS and SEIS has been earmarked to play a part in the next round of growth funding and it was heartening to hear the Economic Secretary, John Glen MP, say on a webinar recently that he was aware EIS hadn’t been able to be included as part of the Future Fund and this was “a gap he hoped to fill”. I've also been told the Chancellor has seen EISA’s representations and is said to be sympathetic of expanding the schemes. If this is true, watch this space next year!
- MARk brownridge
update overview
INTRODUCTION / UPDATE OVERVIEW
We couldn’t do this without the help and support of a number of third parties who have contributed to writing this report. Their contributions range from inputting into the scope, sharing data, giving us their insights on the market, providing copy, and peer reviewing drafts. So, a big thanks to: Andrew Aldridge, Dr Reuben Willcock, Mark Brownridge, Shane Gallwey, Richard Roberts, Jess Franks, David Mott and Neil Pearson. Their input is invaluable, but needless to say any errors or omissions are down to us. We have relied upon MICAP for most of the data that we have based the report upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. The report is made possible by our sponsors, who have contributed copy to the report and supported us by helping to meet production. So, a big thanks to: Blackfinch Ventures, Deepbridge Capital, Guinness Asset Management, Octopus and Oxford Capital
Business relief qualifying shares and share sales Business Relief allows investors who hold Business Relief qualifying shares to sell those shares. As long as they purchase replacement Business Relief qualifying shares within three years of the sale, the two year BR qualification clock is not reset. As the examples of Earthport, WYG and PTSG show, there are examples where it may be worth investors considering earning an immediate windfall, which can then be reinvested in other options a manager considers better long term value. However, investors should be aware of the risk that, should they pass away in between an investment being sold and any replacement shares being acquired within the three year window, they would not be able to claim Business Relief
acknowledgements and thanks
Find out more at MANAGERS IN FOCUS
Readers can claim up to 2 hours’ CPD (excluding breaks). By the end of the report, readers will be able to: • Identify the main developments and news in the EIS market • Understand how Covid-19 has affected SMEs, and the main support measures the Government has put in place • Be able to benchmark products and providers in the market against one another • Know the key fees and charges applied by EIS managers • Recognise some of the benefits and drawbacks of Knowledge Intensive Funds • Be aware of some of the key events likely to impact EIS in the near future
learning objectives for cpd accreditation
Find out more about claiming your CPD
INTRODUCTION / KEY FINDINGS
of consecutive GDP growth in the UK between May and September
Months
234,000
that went out of business by September due to Covid-19
The estimated number of SMEs
245%
and growing, despite Covid
Target return
60
Open offers
45%
are technology focussed
of EIS offers
145
raising EIS funds in 2018/19
knowledge intensive companies
£22
raised through EIS since it launched
billion
in 2020
New offers launched
key findings
6 less than in February
2. Market update
EISA turns spotlight on fee transparency Coronavirus dominates headlines Government schemes for SMEs FCA pauses 10% drop rule what the managers say
EISA turns spotlight on fee transparency
MARKET UPDATE / eisa new guidelines
The Enterprise Investment Scheme Association (EISA) has released a set of guidelines to mark the launch of its initiative aimed at improving the transparency around EIS and SEIS fees.
ue to the number of ways fees can be handled, it can sometimes be difficult to compare the fees of two different fund managers. The set of 6 guidelines aims to offer best practice when documenting their fee structure. These include highlighting the importance of fees charged to investee companies as much as fees payable by investors. Any fees a company pays for the investment diverts capital which could potentially otherwise be used in recruitment, R&D, marketing or elsewhere. In other words, excessive company fees could slow growth, reducing client returns. Clients and IFAs should be aware of fees on both sides, in order to properly consider a fund's fee structure. The guidelines do not suggest or specify the level of fees that should be charged to either investor or investee. The guidance is strictly voluntary, based on what the EISA believes is best practice, and funds can still market their fees differently, if they wish. They form the first part of a wider body of work the EISA is conducting into the topic.
D
eisa transparency guidelines
All fees should be clearly stated, when they are payable, and by whom.
Fees charged to companies matter as much as fees to investors. Both have an impact on the final outcome for investors, and it is misleading to say that fees charged to companies means that it is ‘fee free’ for investors. All fees charged to investee companies should be disclosed. For example, fees for services that are needed or mandatory for the investee company, such as consulting or monitoring services, should be disclosed.
There should be clarity on whether fees are fixed or variable. For example, where monitoring fees might depend on the size of the company. Where appropriate a range can be given, but it should be clear as to the basis being used to decide on the final amount.
It should be clear as to how long fees are payable for, and in what circumstances this can change.
Growth companies have proved a phenomenal engine for change, and 2020 has seen our portfolio companies benefit from behavioural shifts such as digital learning, online retail and remote working. We are seeing high quality investment opportunities coming through for investment in the current tax year
There needs to be clarity on which elements are subject to VAT and which are not. Just to say that VAT is charged as applicable is not sufficient and each fee should clearly have its VAT status given. The net amount of an investment that will be used to purchase shares should be clearly stated.
There should be clarity on success fees, and whether these are calculated on returns that include tax benefits, or not. It should be clear whether these are calculated on a per company or portfolio basis. Disclosure should include the amount of any options or warrants that the manager may receive, as well as any other investment the manager or team may make that is on different terms to those available to their clients.
01
02
03
04
05
06
Initial fee for investor* Annual Management Charge for investor* Arrangement fee for company Monitoring fees for company A performance fee of a percentage on all gains above a certain threshold on returns* On occasion, an exit fee may be charged*
typical eis fees charged
*may or may not include VAT
- Shane Gallwey, Fund Manager, Guinness
Coronavirus dominates headlines
MARKET UPDATE / Coronavirus dominates headlines
In 2020 there has been no getting away from the impact of Coronavirus. At the end of February and start of March, markets were devastated as the world economy braced for a global pandemic not seen for almost a century.
K GDP plunged to its lowest level since 2003 as businesses shuttered - either temporarily or permanently. Although the UK economy grew for each of the four months to October 2020, it has not been enough to reverse the initial losses. In August, UK monthly GDP was 9.2% lower than the levels seen in February 2020, for example. In the listed market, at the time of writing, the FTSE All-share Index remains down almost 20% compared to the start of February, although the FTSE AIM All-share index has fully recovered.
U
uk gross domestic product: seasonally adjusted £m
Source: London Stock Exchange
Forecast neutral
Forecast downgrade
Forecasts suspended
38%
33%
30%
- David Mott, Founder and Partner, Oxford Capital
In the current challenging environment as British businesses start to navigate their way through the pandemic, the start-up ecosystem is more important than ever. We’re passionate about supporting early stage businesses through the EIS scheme because of the significant impact it has in fuelling the growth of these companies and the broader economy.”
FTSE and AIM performance since Covid
Impact on SMEs With much less resilience, the small young companies that are eligible for EIS investment would be theoretically most at risk of going under in the period. A survey by Simply Business found that between February and the end of September, 234,000 small businesses had stopped trading, with one in five saying they would not survive another lockdown. Overall, Simply Business estimated that Covid-19 had cost small businesses up to £69 billion in total. Undoubtedly, this has heightened the risks of making any investment in SMEs, however Simply Business also pointed to reasons to be optimistic about responsive SMEs. They reported being told there were some opportunities to adapt and learn new skills, with 42% increasing their use of technology to cope with the new environment. What’s more, EIS investments have a number of advantages over other SMEs. The Managers in Focus section has a number of examples of successful EIS investments. Many investments are in sectors which have performed better during the crisis (for example in companies looking to disrupt existing models). Also, EIS managers tend to place a great deal of importance on the quality of an investee’s management team, and offer them additional expertise (for example placing an expert on the board). Over the course of the Covid-19 crisis, companies with strong management teams that have reacted positively and strategically have likely performed better than the average SME. Ultimately the situation remains highly fluid. The current restrictions are region focussed and generally lighter than those imposed at the start of lockdown. With a second wave now in full swing across swathes of the UK, there are questions about the Government’s continued support for SMEs, as well as how long the Covid pandemic will continue for.
eis success stories
A mail order pasta delivery company
Lockdown has fundamentally altered consumer spending habits, accelerating the growth of online spending at the expense of traditional ‘brick and mortar’ outlets. At the same time, with people unable to eat out, luxury home dining has become more popular. An online pasta delivery company has been ideally placed to grow in this environment. It recieved £ 1 million EIS funding in February (as well as £3.5 million VCT funding), and has seen its revenues shoot up.
An HR system for doctors
With ministers scrambling to move staff around to deal with Covid-19 patients, and ensuring they don’t mix with other patients, an HR system founded by doctors designed specifically to help deal with problems the NHS had with staffing shortages in the crisis found itself central to London’s efforts to pool its NHS workers. Since it received EIS funding in early 2020, its revenue has almost doubled
Small and agile paper company pivots business for lockdown
For one small company which provides sustainable paper based packaging to the food industry, Covid-19 could have been a deathknell. However its resourceful management team took the business in a new direction, and began manufacturing sustainable PPE face visors. It has now manufactured over 3 million visors, and counts NHS Wales and the UK Department of Health and Social Care among its clients.
DON'T FORGET EIS HAS LOSS RELIEF Although managers and investors will no doubt hope that the investee companies perform well and survive the crisis, there will inevitably be some failures. In such a case it is important to remember that EIS investments qualify for loss relief. The loss relief allows you to deduct an amount of the loss from either income tax or capital gains tax. The rate of relief is linked to the rate of tax. So a top rate tax paying investor claiming the relief on a £10,000 loss against his income tax would be able to claim £4,500 loss relief (or 45%) Loss relief can be claimed for either the year the loss was made, the year before the loss was made, or a combination of the two if the loss is too large to be absorbed into a single year's tax returns. You cannot claim more relief than the amount of tax paid. For more information on loss relief, as well as the other reliefs available through EIS investments (as well as any additional qualifying criteria), see our EIS Guide
Apr 20
May 20
Jun 20
Jul 20
Aug 20
Sep 20
Oct 20
-50%
-40%
-30%
-19.61%
-10%
-1.85%
K GDP plunged to its lowest level since 2003 as businesses shuttered - either temporarily or permanently. Although the UK economy grew for each of the four months to October 2020, it has not been enough to reverse the initial losses. In August, UK monthly GDP was 9.2% lower than the levels seen in February 2020, for example. In the listed market, at the time of writing, the FTSE All-share Indices remains down almost 20% compared to the start of February, although the FTSE AIM All-share index has fully recovered.
government schemes for smes
MARKET UPDATE / government schemes for smes
The UK Government’s reaction to Covid-19 was relatively swift. A national lockdown made working from home the norm, a state of affairs which continues to this day for many.
furlough scheme allowed employers to temporarily tell staff not to work, with the Government paying each furloughed staff member 80% of their salary up to £2500 a month before tax. The scheme is due to run until January 2021, at which point it will be reviewed. Regardless, the Government has announced some form of job retention scheme will remain in effect until at least the end of March. At the same time the Government launched a number of schemes designed to help companies access capital. These include:
Bounce Back loans These allow SMEs to borrow between £2,000 and up to 25% of their turnover (to a maximum of £50,000), which the Government will 100% guarantee. These loans won’t incur any fees or interest for the first 12 months, followed by interest of 2.5% for the remainder of the loan. Companies are not expected to pay anything for the first 12 months and the loans are available until 31 January 2021. Initially loans were to be paid back in six years. This has now been extended to 10 years, effectively cutting repayments in half. In September, the Government also launched ‘Pay as you Grow’ - businesses that are struggling will be able to make interest only payments, while those in trouble are allowed to suspend repayments for up to six months. This scheme is available to businesses that are based in the UK, established before 1 March 2020 and have been adversely impacted by the coronavirus. With very little restriction on which UK companies are eligible for Bounce Back loans, the option to receive funding this way at such low cost could have an impact on the demand for SEIS funding and therefore SEIS investment opportunities. That said, HMRC’s latest SEIS statistics for 2018/19 show that the, “majority of companies receive investments of over £50,000 through the SEIS, with 62% of companies receiving investment of over £50,000 in 2018-19 (the annual limit is £150,000).” This suggests that, even before Covid-19 struck, companies seeking SEIS funding required more than is currently available through Bounce Back loans. It seems that, with the advent of Covid-19, it is not unreasonable to suspect that some small firms will take advantage of Bounce Back loans as well as SEIS funding to address pandemic-related issues and fuel their growth journeys.
Dr Reuben Wilcock, Blackfinch Ventures
The EIS intentionally addresses the key stage in a firm’s journey where a product has demonstrated market fit and capital is needed to scale adoption and revenues.
Coronavirus Business Interruption Loan Scheme The Coronavirus Business Interruption Loan Scheme (CBILS) is available to SMEs with a turnover of no more than £45 million that are based in the UK, and have been adversely impacted by Covid. It is designed for larger loan amounts - up to £5 million. The Government will guarantee 80% of the finance to the lender, and will pay all interest and any fees for the first 12 months. Although companies can borrow far more than with Bounce Back loans, the Government has not mandated the interest repayment rate, and so it could be in excess of 2.5%, and therefore more expensive. In addition, CBILS lenders have more freedom when it comes to demanding security and taking recovery action, even if personal guarantees are prohibited. CBILS are currently available until the end of January 2021, however the Government has shown itself willing to extend this in the past. Again, there is a chance that some SMEs that would normally source EIS funding are opting for CBILS cash instead, or as well as raising through EIS. Despite the £5million upper loan limit, the average amount loaned under CBILS is currently just under £400,000 per approved application, which is within the ball park of the average EIS investee funding round. However, SMEs weighing up their options may have concerns over the burden of future loan repayments, something that does not come with EIS investment. It’s also worth remembering that CBILS is likely to be accessible to much larger firms than are eligible for EIS (to qualify for EIS funding a company’s gross assets cannot exceed £15 million before the share issue, or £16 million immediately after). As a result, a large proportion of the firms applying for CBILS cash simply can not access EIS.
The Future Fund Aimed at innovative UK companies that typically rely on equity investment. Unlike Bounce Back Loans and CBILS, the Future Fund is investor led. It will match 100% of the amount provided by investors, between £125,000 and £5 million, in convertible loans. The fund is open to UK based companies where either half of their employees or half of their revenues are UK based, were incorporated prior to 2020 and raised at least £250,000 in equity investment between 1 April 2015 and 19 April 2020. The loans will have a minimum of 8% per annum interest charge applied (non compounding), which will be payable when the loan converts. At this point the interest will either be repaid or converted into equity. The loan will mature after 36 months, and will convert into shares in the company in the case of an exit or new funding round. Although matched investors will not be eligible for SEIS or EIS income relief under a Future Fund Loan, the redemption, repayment or conversion of a Future Fund convertible loan will not lead to a reduction or withdrawal of reliefs on a previous EIS or SEIS investment. As the Fund is not EIS compatible, it was widely speculated that the Future Fund would be more appealing to Venture Capital Funds than EIS investors. The figures suggest this may be the case. As of October, £875.8 million worth of funds had been invested across 874 facilities - in other words averaging over £1 million per investment. This is more than double an average EIS investment, which tends to come in at less than half a million. This suggests the Future Fund is often being used as extra capital for slightly larger companies than EIS is targeting.
Covid support scheme lending figures
Source: British Business Bank, Nov 2020
Comparison table
MARKET UPDATE / FCA pauses 10% drop rule
T
he 10% rule had been controversial with managers, who worried it could have the effect of scaremongering investors, and may lead to ill advised, panicked early withdrawals. This is doubly problematic for illiquid medium to longer term products such as EIS, where investors need to keep their money invested for a minimum holding period or face having their significant tax reliefs clawed back. With Covid-19 and lockdown playing havoc with markets, and the effects being (in some cases) compounded by the uncertainty that remains around Brexit, it has been possible for valuations of companies to swing wildly, depending on external factors on any one day. Recognising this, the regulator initially announced flexibility around the 10% rule at the end of March, as it understood there could be a large operational burden cost (not to mention regulatory cost) for firms to meet such a rule on an on going basis. It’s worth noting the vast majority of EIS funds are not listed, and therefore will not have the same volatility worries as listed funds. Companies receiving EIS investments will have updated valuations at various times (for example when looking for additional funding or a potential exit). Since Covid, there have been some cases of EIS investee companies losing more than 10% of their value. Where a company's valuation has fallen by more than 10% (as can happen) some of this loss may be mitigated by other investments within an EIS portfolio holding their value, meaning the 10% rule may still not be applicable. Initially these changes were due to last until the start of October, however at the end of September, this was extended for a further six months (to 30 March 2021).
Article 62 of the The Markets in Financial Instruments Directive II (MiFID II) requires investment firms which provide a managed
What is the 10% rule?
FCA pauses 10% drop rule
The Financial Conduct Authority (FCA) has temporarily added an element of flexibility to the so called ‘10% drop rule’ for investment managers in recognition of the extraordinary volatility in the current market.
portfolio to inform clients when the overall value of the portfolio, as evaluated at the beginning of each reporting period, falls by 10%. The firm must continue to do so at multiples of 10, no later than the end of the business day in which the threshold is exceeded.
10%
drop rule
Under the current regulatory flexibility, the FCA said it won’t take action against firms so long as the firm has: • Issued at least one notification in the current reporting period, indicating to retail clients that their portfolio or position has decreased in value by at least 10% • informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period • referred these clients to non-personalised communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualise potential drops in portfolio or position value to help consumers meet their objectives, rather than making impulse decisions about their investments) and • reminded clients how to check their portfolio value, and how to get in touch with the firm
what the managers say
MARKET UPDATE / WHAT THE MANAGERS SAY
So how are the managers feeling about the EIS market and overall investment market conditions? Here's what they have to say.
How have you reacted to Covid-19 and the lockdown? (in terms of investment attitude, not operationally)?
Dr Reuben Wilcock
Ventures Director Blackfinch Ventures
The opportunities have been in well-managed, cash generative businesses where the inherent value of the enterprise has been mispriced by the market. We saw 3 of these taken over in 2019. Cyclical stocks performed well after the election result, but this excitement has rapidly evaporated at the start of 2020.
managers:
How have SMEs been able to weather the economic storm?
While some firms have seen temporary downturns, others have grown. These companies’ innovative technology, including remote services, means they can further grow as customers adopt new ways of working. Firms have also completed team restructurings and changes to plans and roadmaps. They’ve then been able to continue as high-growth businesses disrupting their sectors, bringing significant return potential.
Andrew Aldridge
Partner & Head of Marketing Deepbridge
Shane Gallwey
Fund Manager Guinness Funds
jess franks
Business Line Manager Octopus Investments
What has been your 2020 highlight?
We successfully closed three new deals and four follow-on investments in March under full lockdown conditions. In May we then led the launch of #ISOLATIONINTERN in partnership with investment firms and universities. This enabled several of our EIS portfolio companies to acquire some amazing specialist talent under pandemic restrictions. It has also been fantastic to see so much innovation amongst our portfolio.
Richard Roberts
Head of Investor Relations Oxford Capital
We have guided the management teams of our portfolio companies to be as proactive as possible and help them manage cash and minimise disruption. In terms of new investments our generalist approach has allowed us to pivot our investment focus to businesses likely to benefit from disruption.
We required all our investee companies to provide a Covid-19 impact assessment and revised 2020 budget. We encouraged companies to take decisive action early. We worked closely with management teams to help conserve cash, and access government-backed aid. This includes furloughing employees, CBILS, rate holidays, the Future Fund.
Several of our portfolio companies have performed exceptionally well this year. On an aggregate level, our portfolio is in good shape which is pleasing considering the disruption this year. The performance of online retailers has been particularly strong. Pasta Evangelists has been a highlight, with revenues up tenfold on last year.
Our position as one of Europe’s largest venture capital firms means we are fortunate to have access to many of the most exciting early stage companies. The UK is now regarded as one of the best places in the world to grow and scale a business having 30 of the 112 $1bn companies founded since 2000 1 . Whilst various sectors like travel and retail have struggled, we’ve seen incredibly strong adoption of technology as a result of Covid-19 that might have otherwise taken years, and this comes with a lot of opportunities for investors in tech-enabled businesses across the sectors we focus on (future of health, future of money, deep tech and consumer).
Entrepreneurs thrive on challenge so it is no surprise to see that smaller early stage companies responded boldly to the crisis. When a crisis hits, we are all required to think differently. Immediate challenges need to be faced, but disruption also presents a longer-term opportunity to re-think industries that have so far been resistant to change. A start-up’s very existence is built on being able to grab opportunities with an agility rarely seen in bigger, long-established companies. This means that a lot of the companies we invest in are fact well placed to be net beneficiaries of the crisis in the long term. Clearly, this year has been challenging for some start-ups, but we’ve also seen an acceleration of fundamental changes in how we live and work. We focus on tech-enabled companies and whilst some sectors like travel have been hit hard by a decrease in demand, lots of our businesses like Depop (an ecommerce business) have flourished from shifts in customer demand that were brought forward by Covid-19.
Being able to launch a new EIS Service designed to meet the needs of our customers and based on their feedback. It feels like a really good time to be able to offer investors a choice of how to back smaller companies, and an important time to be looking to support those businesses with the most growth potential. Both the reaction to the pandemic of the companies we already back and the wealth of great opportunities in the market are very positive.
While the impact of Covid-19 has undoubtably been a challenge, our attitude to investment has not changed. As long-term investors we have sought to support and advise our management teams on how best to navigate through this phase, ensuring they have sufficient cash runway in place and strong Board/shareholder engagement. Our portfolio companies have shown real resilience through this period.
The Covid-19 crisis has really concentrated the minds of founders, it has brought out the best in them as they have streamlined and improved their businesses to cope with and take advantage of the situation. For example, one of our portfolio companies, Artfinder (online art marketplace) recorded its best sales quarter in its history for Q2 2020 as consumer behaviour shifted online.
Delivering our second deep-tech exit within 6 months in June was a definite highlight. Our portfolio company, Ultrasoc was acquired by Siemens, UltraSoc’s chip design technology has applications across multiple industries, including new chips designed for the autonomous cars of the future. This followed the acquisition of Latent Logic to Waymo (part of Alphabet Inc/Google) in December 2019.
Our immediate response was to assess our investee companies and identify both opportunities and challenges. Deepbridge’s tradition of hands-on and proactive support for investees has never been more important, as we have been able to work with investees to help them through this period or, where possible, help them scale.
In any challenging scenario, there will be winners and there will be losers. Whilst the economic storm created by the global pandemic has decimated some sectors, notably high street retail and hospitality, there have been other sectors positively affected. These include areas within the worlds of life sciences and disruptive tech. Therefore, for some organisations it has not been about ‘weathering the storm’ but maximising opportunities.
At Deepbridge, as well as working extensively with our investee companies, we also used the lockdown months to focus on a number of key long-term projects, processes and systems within the organisation. We look forward to advisers and clients seeing the benefits of the team’s hard work over the coming weeks, months and years.
andrew aldridge
3. Considerations for Investments
fees and charGEs
Foreword Opening Statement Update Overview Key Findings
Coping with Coronavirus Beyond the Coronavirus Recent Performance 2019 Performance An International Market? Budget Update What the Managers Say
AIM Acquisitions Better Reporting
3. INdustry analysis
Market Composition Fees and Charges Sector Diversity
4. considerations for investment
Close Brothers Sarasin & Partners TIME Investments AIM Solutions Comparison
Coronavirus Impacts The non Covid-19 Future What the Managers Say
market composition
CONSIDERATIONS FOR INVESTMENT / MARKET COMPOSITION
The previous EIS Update analysed figures released before Coronavirus hit the UK market, and the country entered national lockdown. Although we are still a long way from being ‘out of the woods’, over half a year later, much has changed. Emergency measures have either prevented or restricted the ability to meet face to face for much of the year across the UK, and swathes of UK businesses have had to close temporarily or permanently. During this time, certain types of companies have performed better than others although, regardless of sector focus, all managers are operating in a tougher, more uncertain environment. Given the fact the country was in full lockdown for several months of the year, and that even where lockdown has lifted, numerous restrictions continue to apply, it is perhaps unsurprising that the number of new launches is dramatically lower than in previous years. It is noticeable that three EIS launches (over half for the year) took place by the start of March (i.e. before lockdown measures were brought in), and then no more launches took place until September, a period when Covid-19 restrictions were being withdrawn and case numbers were comparatively low. This will have all been compounded by the Brexit question, which - despite not dominating the headlines as much as it has in the past - remains unanswered, encouraging managers to perhaps take a more ‘wait and see’ approach.
How do we use MICAP?
In this section we will detail how the overall EIS market has developed over the previous few months, as managers have learned to cope with a rapidly changing world. Unless otherwise stated, all data here is taken from MICAP, and is true as of Nov 2020.
Founded in 2013, MICAP provides quality independent due diligence, research tools and panel support services on the tax-advantaged investment market. It is a sister company of Intelligent Partnership, and a part of the Indagate Group of companies.
Recent years have seen technology focussed EIS offers become much more common, and over the past months this trend has continued to develop. By November, 45% of open offers were technology focussed, up from 43% in February. This was in turn up 1% compared to September 2019. It is important to remember that ‘General Enterprise’ funds - the second largest category, which jumped from 38% to 43% - would also include investments in technology, so it is likely that over half of all EIS investments made are in companies that would be classified as investments in ‘technology’ companies. Although this raises questions about the level of diversification across the market, it may well comfort investors who have seen technology companies post incredible gains on listed markets, as traditional business models struggle to cope with lockdown rules, and find themselves supplanted by smaller, nimbler companies offering new solutions. At the same time, entirely new needs caused by lockdown have been met by technology companies that have, in turn, witnessed spectacular growth. Although the majority of EIS investments are not listed, the unlisted tech start-ups will no doubt have the same opportunities. With the UK enduring a second wave over the Winter, it seems unlikely that things will return to normal anytime soon, and so this trend may well continue into the new year.
NEW EIS LAUNCHES
Apr-Nov 2020
25
Q1 2020
2019
2018
23
open offers by sector
The slide in Media and Entertainment focussed funds appears to have stopped over the past six months, remaining flat at 7%. Although Coronavirus will have made production operationally challenging, the launches of Disney Plus, Apple TV and a host of smaller streaming companies means there continue to be opportunities in this field. 2019 notably saw the launch of the Creative Content Fund backed by the British Film Institute, which made a number of investments during lockdown, for example. All other sectors saw less representation compared to earlier in the year, with the sole food and drink offer now no longer open. Industry & Infrastructure and Pharmaceuticals both saw the number of options reduced. The drop in pharmaceuticals is interesting as it comes at a time when many listed pharmaceutical companies have had pandemic related opportunities opened to them. This is a good reminder that, while sectors are important, managers still need to consider the individual underlying investees available within a sector as well.
nov 2020
feb 2020
Tech General Enterprise Media & Entertainment Pharmaceuticals Industry & Infrastructure Food & Drink Blend
Andrew Aldridge, Deepbridge Capital
A majority of EIS money continues to be invested in to the technology sector, which shouldn’t be a surprise as this is where a majority of innovation occurs. the key areas for investors to look at should be: is the technology disruptive to an existing marketplace, does the technology have the scope to be used within multiple markets, is the technology globally scalable and is their likely to be margin?
number of open offers
2017
NOV 2020
65
66
54
63
The average number of companies EIS funds are aiming to invest in was dramatically lifted to 8.5 by the addition of a fund targeting 50 investee companies. Without this fund, the average target number of investments was 7.7, which still represented a small uptick compared to February (7.6). This trend has been developing for a while now, with the average number in September 2019 being 7.5. While investors will no doubt be positive that funds are generally targeting slightly more companies, due to the concentration of funds in technology, there is an argument that there are less options available for investors wishing to diversify by sector as well as the number of companies invested in.
Diversification
Given the difficulties endured by the wider economy it is encouraging to see target returns have not only continued to increase over the year, but that that pace of increase has also accelerated over the same period. There may be a few reasons for this. As discussed elsewhere, the government has released a number of schemes aimed at SMEs, in order to help them survive the pandemic. Although even Chancellor Rishi Sunack will admit many companies won’t have, and will not, survive, it has introduced extra liquidity into the market. And while many companies have struggled during Covid, it has also accelerated underlying business trends such as digitization. Considering the number of technology focussed EISs, any general societal shift to a more digital environment would be positive. In addition, the general consensus has been that businesses with motivated management teams who were able to react rapidly and put in place measures to ensure work could continue in general had a better chance of survival. The perceived quality of management teams is often a requirement for receiving an investment from an EIS fund, and EIS managers generally spend a great deal of time ensuring their investee companies are well run. This often includes appointing industry experts onto the company board. This should have put many companies which had received EIS investments in a better position to grow or at least survive during the Covid pandemic compared to other SMEs. That said, EIS investments are always relatively high risk, and that risk will have certainly increased over 2020. Although the average expected returns may have increased over the year, the chances of any individual investment going under in this time will have increased in many cases, and therefore it is important anyone exploring EIS remains comfortable with the possibility of losing money.
Target Return
diversification
target return
Offers by sector
fees and charges
CONSIDERATIONS FOR INVESTMENT / FEES AND CHARGES
Data provided by MICAP
deep dive into fees and charges
Given the uncertainty that has overshadowed the previous seven months, the fact that the slow increase in AMCs that had been occurring since 2017 does not appear to have continued since February suggests managers are wary of increasing ongoing fees for investees in such a difficult economic climate.
In contrast, the initial charge has risen slightly over the year, from 3.6% to 3.7%. This is up notably from September 2019, when the total initial fee was just 3.3%. The ongoing increase in fees over recent years perhaps highlights that managers are having to work harder to find good EIS qualifying companies that meet the risk to capital conditions and still have the quality for strong growth. This increase came from investors, as the amount charged to investee companies fell from 2.7% to 2.3%. It should be noted this remains some way above the 1.5% charged in October 2018. The highest initial charge to either investor or investee remains 10%. A possible reason as to why fees for investee companies are falling across both initial charges and AMCs could be to do with the recent uncertainty. The current business environment is extraordinarily tough, so slightly lower fees could be managers looking to give their investments a slightly better chance of success. With the EISA currently reviewing fees, it will be interesting to see if fee structures change. At present, the Association is only looking at how fees are marketed, to ensure IFAs and investors are able to understand and compare different offers.
While the average total charge remains the same, there has been a slight rebalancing across the market in this period, with investors paying slightly more on average - up from 0.6% to 0.8%. In contrast, the average AMC charged to the investee company has fallen from 1.1% to 1%. This might be initially disheartening for investors, but it is important to remember that any fees the investee company pays reduce its potential for growth, potentially reducing the investors eventual gains.
average amc to investors
total amc (nov 2020)
inital charge (nov 2020)
The trend of minimum subscriptions gradually reducing has reversed this year, in no small part thanks to the launch of a new EIS offer with a minimum subscription of £50,000, and an older offer with a minimum subscription of £5,000 closing. Although this shifted the average minimum subscription up compared to earlier in 2020, it remains below the £20,000 recorded in the Autumn of 2019. As these two movements are the key reason for the average growing, it is perhaps too early to say whether this is the beginning of a general shift to higher minimum subscriptions. If it is the case, it is likely that it is a sign that managers are becoming more confident in their interpretation of the risk to capital requirements, and therefore investing in slightly larger companies that require more funding than they were in the immediate aftermath of the new rules. With the launch of Knowledge Intensive Funds in 2020, it is possible minimum subscriptions could increase. KICs are able to target slightly larger, older companies, and therefore managers may require slightly more capital in order to make the required capital investments. Due to the low number of launches so far in 2020, it is hard to draw any definitive conclusions at this point in time, however.
minimum investment requirement
Refresher:
What is the risk to capital condition?
The Autumn Budget 2017 introduced a new ‘principles based approach’ to identify lower risk activities that should not benefit from the tax reliefs. This crystallised in the risk to capital condition, which has applied since March 2018 and is intended to exclude tax motivated investments, where the tax relief provides most of the return for an investor or where there is a limited risk to the original investment (i.e. a ‘wealth preservation approach). The condition depends on HMRC taking a ’reasonable view’ as to whether an investment has been structured to provide a low risk return for investors. There are two parts to the condition: 01. Whether the company has objectives to grow and develop over the long term (which broadly mirrors an existing test with the schemes); and 02. Whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return.The condition requires all relevant factors about the investment to be considered in the round. These rules apply to all VCTs, as well as investments through the Enterprise Investment Scheme and Seed Enterprise Investment Scheme.
the risk to capital condition
to investor
1.4%
to investee
2.3%
- Jessica Franks, Head of Tax, Octopus investments
Increasingly, high net worth investors are excited by the prospect of backing the ‘next big thing’ and are looking to access the most exciting companies in a tax efficient way that recognises the risk they are taking.”
4. Industry Analysis
HMRC figures show drop in EIS funding First SEIS drop from risk-to-capital knowledge intensive funds
HMRC figures show drop in EIS funding
industry analysis / HMRC figures show drop in EIS
ince EIS was launched in 1993/94, 31,365 companies have raised £22 billion of funds through the scheme. As the graph below demonstrates, the popularity of EIS exploded in the first half of the last decade, following an increase in the income tax relief from 20% to 30% in 2010/11, and as low interest rates after the financial crash ate into savings. In the 2018/19 tax year, 3,905 companies raised £1,824 million in funds through EIS. This compared to 4,080 companies raising £2,001 million the year before. The main reason for this drop is likely to be the implementation of the new risk-to-capital requirements, which came into force towards the end of the 2017/18 tax year. It is likely that there was a surge of investments that would not meet these conditions after 2017/18. Many predicted that the risk-to-capital requirements would decimate investment levels into EIS as lower risk, capital preservation strategies were banned and the overall risk profile of EIS qualifying investments available was pushed up. But the 4.3% drop in the number of companies that raised EIS investment and the 8.8% drop in the overall amount raised in 2018/19 is nowhere near the catastrophic damage that some foresaw the new rules inflicting on small, young UK companies in need of funding.
S
In May, the Government released the annual EIS figures for the 2018/19 tax year, showing a moderate decline in the amount invested in EIS compared to the year before. It is important to note that these figures are all from before the current crisis, and therefore Covid and the lockdown cannot be blamed. Unless stated otherwise, all figures are taken from HMRC’s data.
Reaction to previous rule changes suggests that more restrictive rule changes clearly unsettle some advisers/investors, but once they are accustomed to the adjustments, any drop in investment amount and numbers steadily recovers, probably because of the power of the tax reliefs on offer. That makes EIS not only a robust funding source for young companies, but also a fairly predictable one for those in government concerned with methods to drive growth in them. Since the amount of income tax relief was increased at the start of the last decade, EIS has raised over £1 billion for small businesses in need of capital every year. One potential worry is that in 2018/19, just 28% of funding was raised by companies using EIS for the first time. The number of companies using EIS to raise funds for the first time has been declining for four years, and in 2018/19, there were just 504 companies in this category - less than half the amount compared to three years prior. This suggests advisers feel safer investing in companies they have already worked with, and better understand, rather than making investments into new companies for the first time. Although the fall in new companies began prior to the introduction of the risk-to-capital rules, these changes likely exacerbated the fall.
See Fees and Charges section for explanation of the risk-to-capital requirement
The 2018/19 data is also the first to include information on knowledge intensive companies (KICs). In that year, 145 KICs raised £95 million pounds - an average of £665,172 per company. This was notably above the all company average of £467,093, suggesting KICs were utilising the extra amounts they could raise. With new approved EIS Knowledge Intensive funds launched this year, it is likely the number of KICs will grow relative to the total number, which may bring up the average amount raised in total.
Regional split
The South East has continued to dominate EIS, as it has done for a number of years. 65% of investment - whether measured by amount invested or companies - was in London and the South East. London alone accounted for nearly 50% of investments. This is perhaps not a huge surprise - a large number of startups are clustered in these regions, and to an extent the money is following where the bulk of investment opportunities are. But, for those looking to achieve geographical diversity, it is worth looking at fund portfolios to see how many investee companies are based outside London.
number of companies raising funds via eis
amount raised via eis
Proportion of investment
Proportion of companies
First SEIS drop from risk-to-capital
industry analysis / first seis drop from risk-to-capital
SEIS is often viewed as the smaller brother of EIS. Introduced in the 2011 Autumn Statement, SEIS offers very similar types of tax incentives for investment, but with larger reliefs. The amount that can be invested in SEIS is lower, and the companies which can receive SEIS funding are also smaller and, therefore, higher risk.
s the amount that can be invested is lower, and the risk is higher, SEIS raises substantially less than EIS. Since it was introduced, the amount being raised had grown steadily every year, however HMRC’s estimates for 2018/19 suggest for the first time in its history, it shrank in that tax year. According to HMRC data, in 2018/19, 1,985 companies raised a total £163 million through SEIS.
Similar to EIS, the introduction of the risk-to-capital requirement is likely behind most of this drop. However the drop in capital raised is much more severe. In EIS, the provisional numbers point to a 8.8% drop in funding, whereas in SEIS, these figures show a 16.4% drop. A possible reason for the higher percentage drop could be that SEIS investors and advisers are less used to rule changes compared to their EIS peers, and therefore saw a larger percentage drop off to take stock of its effects - especially when SEIS companies tend to be inherently riskier to begin with. As with EIS, it is expected this will be a short term drop as managers and IFAs understand the wider impact of the new rules. As they gain a greater understanding of the impact, it will likely creep back up (bar any effects of Covid and Brexit). One area SEIS contrasts with EIS is that the majority of SEIS companies - over 1500 of them - were using SEIS for the first time.
Differences between SEIS and EIS
As companies can only raise £150,000 and must be under two years old, it is perhaps unsurprising to see so few reuse the relief. A number of SEIS managers also run EIS portfolios, on the understanding that successful SEIS companies will likely make good EIS companies in the future, if they end up needing to raise additional capital. This can work well where the management team and fund manager are already used to working together. The average investment per company in 2018/19 was £82,000. This has been climbing over recent years - up from £80,000 the year before, and £77,000 in 2016/17. One possible explanation for this is that as the relief matures, and manager’s deal pipelines become more advanced, they are becoming more confident investing slightly larger amounts into what remain very young and small companies. As well as this, in 2015, the Government removed a rule requiring companies to spend 70% of SEIS funds before raising additional EIS or VCT funds. Since then, the average investment per company has increased every year.
amount raised (£m)
companies raising funds
Knowledge Intensive Funds
industry analysis / Knowledge Intensive Funds
On 6 April 2020, new legislation came in, replacing the old ‘Approved EIS Fund’ structure with the ‘Approved Knowledge Intensive EIS Fund’ (KIF).
hese are designed to promote investment in the types of company which require extra capital compared to normal EIS recipients, over a slightly longer period of their life. KIC’s are defined as those which spend a substantial amount on research and development, in order to develop intellectual property that will drive the greater part of their future business. Knowledge Intensive Companies (KIC) have more flexibility when it comes to raising EIS funding, compared to normal companies. Adding to this, investors are able to invest up to £2 million, provided any amount above £1 million is invested in KICs. From an investors point of view, this allows them to place more money into EIS, receiving more of it’s generous perks. In addition, it gives them access to investment in slightly more mature companies, potentially lowering the risk, and many of these firms are likely to be technology based - a sector with a strong EIS history as a result of its high growth potential. Nevertheless, it’s worth remembering that it can be more time consuming and costly for these firms to develop because of the amount of research that can be required to reach the stage at which products can be commercialised. This could translate to the requirement for a longer investment term.
• Can receive £10 million EIS funding per year, compared to the typical £5 million • Can be up to 10 years old, as opposed to 7 • £20 million lifetime limit, instead of £12 million • Can have up to 500 employees, up from 250
KIFs are designed to encourage more investment into KICs. Approved KIFs have a number of criteria they must fulfill to remain approved. These are: • At least 50% of capital must be invested within 12 months of the fund closing date • At least 90% of capital must be invested within 24 months of the fund closing date • Within that 24 month period at least 80% of the fund’s capital must have been invested in the shares of companies that were knowledge-intensive at the time the shares were issued • The fund must invest in at least 4 companies, and no single company must receive more than 50% of the capital the fund invested.
EIS funding per year, compared to the typical £5 million
£10 million
IFAs need to be aware that this structure provides managers with a little bit of flexibility when it comes to how much of the fund is invested into KICs. Although 80% of the funds capital must be invested into KICs within 2 years of the fund closing, this still means 20% could be invested into non-KIC EIS companies. For clients only wishing to invest in KICs, it is worth understanding the managers investment strategy in this regard before advising on the matter. A clear risk is if the manager is not able to invest enough funds within the relevant time frames. The Government’s current guidance on such a scenario is somewhat vague for IFAs and managers: “If it is not possible to certify that the conditions have been met within 24 months of the date when the fund closed guidance should be sought from HMRC.” That said, there are a few reasons why this risk is not as great as it might appear. Most managers aim to invest their funds well before the two year mark, regardless of whether they are raised through an approved KIF or not. In addition, if they are unable to invest in that period, they could also return some of the capital to investors to meet their requirements. The rules regarding qualification as a KIC can be complex, so there is also a risk that companies deemed by investees to be KICs do not in fact meet HMRC’s requirements. Consequently, expert advice may be required to mitigate this issue. Beyond this, the risks are more typical of EIS investments - if the manager has to exit within 3 years, for example. Although, speaking at the Intelligent Partnership EIS Showcase, Neil Pearson, partner at Mills & Reeve, noted that there is potentially less political risk with approved KIFs, as there is a clear political will to get more investment into innovative business and for the funds to be a success.
Benefits
In return, there are a number of benefits for investing in a KIF. Key is that investments are treated as if they were made in the tax year the fund closes. So potentially a fund could close, but the manager doesn’t manage to invest some of the capital for 18 months. In a normal EIS situation, that investment would be considered as made in that tax year. In an approved KIF, that will be counted for the year when the fund closed, meaning the tax reliefs will be available sooner. This can be compounded by the fact that the investor can carry back the investments into the fund into the previous tax year, assuming they haven’t used up the previous year’s annual limits. All this allows investors to better plan their strategy, and potentially start applying those tax reliefs much earlier.
flexibility of Knowledge intensive companies (KIcs)
KIF investment timeline
Example investment pattern £0 invested
Fund closes with £100,000 worth of investor capital
year 0
The fund must have invested 50% of all capital
12 MONTHS LATER
Manager invests £40,000, split between 3 KICs, and a further £10,000 into a non KIC EIS Investment
24 MONTHS LATER
By now, the manager has invested a further £40,000 into a single KIC. The fund has now invested £90,000 of its original £100,000. Of this, £80,000 is invested into KICs
• 90% of the total fund capital must have been invested • 80% of the total fund capital must have been invested into KICs
The fund has the option to invest the final £10k into a KIC EIS or a non KIC EIS, as the rules allow for up to 20% of the money invested in the KIF to be put into non KIC EIS
Later date
5. Managers in Focus
blackfinch deepbridge guinness octopus investments oxford capital
Blackfinch Group is an independent investment specialist with a heritage dating back over 25 years. A trusted provider, we work in partnership with advisers. Our businesses cover tax-efficient solutions, early stage investing, managed portfolio services, property financing and renewable energy. Blackfinch Ventures is our early stage business, working with a technology mandate. Our team of technology specialists and entrepreneurs invests in fledgling companies with great ideas and strong teams. We’re supporting firms set to disrupt their market and make a difference to people’s lives. The team works closely with businesses to help them succeed. Across the Group we work for a positive impact and a more sustainable future as an Environmental, Social and Governance (ESG) investor. We’re proud to be entrusted with over £400 million in assets under management and administration.
About the manager
managers FOCUS / blackfinch
Safety at work is a priority globally. Tended is a technology-based start-up, delivering intelligent and affordable personal safety wearables and monitoring systems. Its patent- pending technology uses machine learning. This allows it to automatically monitor a user’s safety and alert a key contact in the event of an accident or emergency. The passion and drive of the Tended team was evident when they first pitched to us. In growing the company, they have achieved an incredible amount. This includes developing hardware and software and landing commercial trials with multinational companies. These include Rolls-Royce, Siemens, Scottish Water and Balfour Beatty. The team also adapted quickly to the coronavirus pandemic, launching a new wearable solution to monitor and help maintain social distancing within workforces. Wrist vibrations alert workers when they’re too close to others and ultra-wideband technology ensures high accuracy. This helps firms to stop the spread of the virus while maintaining user privacy. Numerous paid trials have resulted from this innovation, with pipeline order value in the region of millions. In 2020 the firm was also accepted on an accelerator run by Government Communications Headquarters. We’re excited to support Tended, bringing real safety benefits to major businesses.
The Blackfinch Ventures EIS Portfolios are our open offering as a provider of Enterprise Investment Scheme (EIS) services. We have a strong track record in EIS, having previously raised funding across sectors. We’re passionate about supporting new firms as they grow. We invest in new technology firms operating across sectors, with offerings based on ground- breaking new concepts or highly specialised technology. With the potential to change the way we live and work, they’re set to make an impact in global markets. We target higher returns of 3-5x on investment. We work closely with firms, from investment to development to exit. Risk management is key to our strategy. Clients can also access EIS tax benefits.
http://www.blackfinch.com/ 01452 717070 enquiries@blackfinch.com
contact
our offer
investment case study
Deepbridge was founded with the aim of building an investment team that could redefine tax- incentivised growth-focused risk capital. Our purpose is to provide reassurance to investors by enabling them to invest alongside our team of passionate and experienced domain specialists. A genuine blend of skillsets from a cohesive team that know what it is like to run a business and who have a balanced approach between strong management, practical experience, and demonstrable governance. Deepbridge believes in supporting, mentoring, and investing alongside energetic, committed, and highly performing management teams. Our ambition is to help these businesses achieve their full potential and thereby provide the best possible outcomes for our investors. The global pandemic means that we are in unprecedented times, but Deepbridge’s investment style of providing hands-on support to investee companies has never been more important.
managers FOCUS / deepbridge
Elasmogen Ltd is a biologics company that was spun out of the University of Aberdeen and has developed a proprietary ‘soloMER’ platform. Specifically, the Company’s technology comprises platform exploiting the power of biologics as drugs in small, simple and stable formats (‘soloMERs’). Specifically, they are small (i.e. 9% of the size of a human antibody) and highly stable proteins, making them ideal for both site-specific delivery and the penetration of solid cancerous tumours. Since the outbreak of the Coronavirus pandemic, Elasmogen has shifted its short-term focus to help the fight against the virus and the Company has been awarded a grant from the Scottish Government to develop more efficient point of care testing. It is envisaged that the Company will use its drug discovery approaches, to generate point of care (or bedside) tests which will help accelerate clinical decision-making and deliver test results expeditiously.
The Deepbridge Technology Growth EIS and Deepbridge Life Sciences EIS provide opportunities for investors to participate in a portfolio of actively-managed growth-focused technology and life sciences companies, taking advantage of the potential EIS tax reliefs available. With a diversified portfolio of companies seeking growth funding, the Deepbridge EIS funds invest in growth companies that possess an innovation that is targeting commercialisation, with robust intellectual property, and which are operating in a high growth market sector. The Deepbridge Technology Growth EIS is focused on investing in growth-focused companies that are seeking to commercialise and expand, principally in these sectors: • Energy and resource innovation; • Business enterprise software; • High growth IT‑based technologies. The Deepbridge Life Sciences EIS focuses principally, but not exclusively, on these sectors: • Biopharmaceuticals; • Biotechnology; • Medical Technology Deepbridge takes an active role (not just a non-executive Board seat) to guide, mentor and counsel the management team of the investee company. The provision of hands-on operational experience, combined with financial expertise can seek to materially mitigate the investment risk borne by the Investor.
deepbridgecapital.com 01244 746000 info@deepbridgecapital.com
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Guinness Asset Management is a London-based specialist fund management company, established in 2003 with 40 employees. Guinness manages £2 billion for institutional and retail investors, investing in public and private companies. Guinness has established itself as a leading EIS Investor, who since 2010 has raised and invested over £200 million into more than 100 companies across our Guinness EIS and Guinness AIM EIS portfolios.
managers FOCUS / guinness
Cera Care was founded in 2015 to disrupt the dated and fragmented home care industry, using technology to automate and enhance services. Guinness Asset Management invested £3.5 million as part of a syndicated £7m round in 2018 and £2.8m as part of a £7.2m round in 2019. Social care is a rapidly growing market in the UK, with domiciliary care being the fastest growing segment. The non-residential adult care industry is characterised by its fragmented nature with over 10,000 regulated providers of domiciliary care operating in the UK. The high levels of market fragmentation, reduction in government care expenditure and a squeeze on profits has led to market instability. Cera is focused on addressing these market pressures through technology. Cera by numbers; • 5000 staff delivering 25,000 visits a day • 1.8 million care visits to date • £100m annual recurring revenues The Company’s technology automates the matching of patients and carers, operations and logistics, and enables better management of care records to improve profit margins, while at the same time improving the quality of care. Cera has been at the forefront of efforts to recruit an additional 10,000 carers into the UK Care sector. Cera recently closed an investment round at a 2.6x uplift to Guinness’ original investment price.
The Guinness EIS is focused on identifying and investing in growth companies across multiple sectors. The service has invested over £85 million since 2017 into more than 30 growth companies spanning 10 sectors. Within the universe of EIS-qualifying investments, our Guinness EIS Service is focused on identifying and investing in growth companies that require scale-up capital. We filter for companies with at least £1 million of historic revenue based on a proven technology, service or product. We are generalist investors and have invested into a wide range of sectors including technology, manufacturing, retailing, healthcare, leisure and food & drink. This generalist approach allows us to mitigate risk by targeting balanced and diversified portfolios for investors. The Guinness EIS closes tranches quarterly and targets full investment in the same tax year as a tranche closes. We target a portfolio of ten companies for investors, with portfolios for the last eight tranches containing eleven investments on average. When selecting companies for investment we favour: • Experienced and competent management teams with a strong understanding of their market and competitive position, and with a track record of building and selling companies. • Maturing companies and businesses with clearly defined growth paths. The Manager favours businesses with a proven technology, service or product. Over the last two tax years investee companies have had average revenues of £2.8m at the point of investment.
guinnessfunds.com 020 7222 3475 eis@guinnessfunds.com
Octopus Investments is the largest provider of enterprise investment schemes, venture capital trusts, and investments that qualify for relief from inheritance tax. We have more than 750 employees and manage over £9 billion on behalf of tens of thousands of investors. Over the last 20 years we’ve been investing in sectors we know inside out: smaller companies, renewable energy, healthcare and property. Having invested over £2 billion in early-stage companies, we now have over 120 investment managers, 30 of which are dedicated to venture investing. We go beyond being a source of finance for early-stage businesses looking to grow. Our aim is to make these companies as successful as possible, by providing practical and strategic support. In fact, our proven reputation for successfully helping businesses grow has encouraged entrepreneurs to actively seek us out for investment. Our previous track record for identifying, growing and exiting some of Britain’s brightest companies includes investments in Graze, Secret Escapes, Zoopla and Tails.com to name but a few.
managers FOCUS / oxford capital
The investment team managing the Octopus Ventures EIS Service has made investments in some revolutionary early-stage businesses. One example is Bought By Many, the insurance company ‘designed for pets and loved by owners’. Bought By Many is an award-winning pet insurance provider which builds previously unavailable policies by listening closely to the needs of pet owners. Co-founded by talented entrepreneurs in 2012, it launched its market-leading policies in 2017 and now covers more than 250,000 pets in both the UK and Sweden. Not only has it been voted the “Most Trusted Pet Insurance Provider” at the 2019 Moneywise Customer Service Awards, but it has also won the Feefo Platinum Service Award (2019). Furthermore, it has been ranked as one of the best pet insurers by Which?; been included in the Sunday Times’ “Tech Track 100” three years in a row (2018 – 2020); and has been named by WIRED as one of the “hottest start-ups in Europe”.
The Octopus Ventures EIS Service gives investors the opportunity to invest in early-stage businesses with high growth potential, handpicked and managed by our expert investment teams. Our EIS service should appeal to clients who want to target high growth from exciting long-term investments, and who have the risk appetite needed to do so. Octopus Ventures EIS Service at a glance • A portfolio of 10-15 companies expertly selected for their growth potential. • We select companies aiming to deliver ten times the amount invested at the initial funding stage. • Access to the expertise of Octopus Ventures, the team that manages Octopus Titan VCT, the UK’s largest VCT . • Annual management charge deferred until exit and contingent on the performance of each company in the portfolio. EIS investors can also claim 30% upfront income tax relief and where individual companies grow in value, any growth is free from capital gains tax. Where companies fall in value, investors can claim tax relief for losses. Investments also qualify for business property relief (a relief from inheritance tax) and capital gains can be deferred into them.
octopusinvestments.com 0800 316 2067 support@octopusinvestments.com
• The value of an EIS investment, and any income from it, can fall to nil as well as rise. Investors may not get back the full amount they invest. • Tax treatment depends on individual circumstances and tax rules could change in the future. • Tax reliefs depend on portfolio companies maintaining their EIS-qualifying status. • EIS shares are by their nature high risk, their share price may be volatile and they may be hard to sell.
Key risks of an EIS investment
The Octopus Ventures EIS Service gives investors the opportunity to invest in early-stage businesses with high growth
octopusinvestments.com 0800 316 2295 investorsupport@octopusinvestments.com
The Association of Investment Companies, October 2020
Established in 1999, Oxford Capital is an alternative investment manager passionate about investing in early stage technology companies. For over 20 years, we have offered private investors access to some of the most impactful technology companies in sectors which the UK is considered a world leader. We partner with portfolio companies and founders to grow their businesses and deliver meaningful impact in their fields. Based in Oxford and London, we are at the heart of Europe’s most exciting technology clusters.
Moneybox is a saving and investing app that enables customers to round up their purchases to the nearest pound and set aside their spare change. It is one of the UK’s fastest growing asset managers and fintech platforms, giving hundreds of thousands of people access to cost-effective investment products designed to meet their life goals. Moneybox has been on a significant growth trajectory since its launch in 2015 and in particular as the nation has focused on its financial wellbeing throughout the pandemic. In the last 12 months alone, it has grown rapidly to reach £1bn in assets under administration for over 450,000 customers. It took the company 42 months from launch to go from £0m to £500m and just over four months to go from £500m to £1bn. Customer growth is up 121% on June 2019 and an average of £100m is being deposited by customers every month. In July 2020, it closed a £30m series C fundraise and launched a crowdfunding campaign that proved to be the most popular fundraising campaign of the year on Crowdcube. At Oxford Capital, we first invested in Moneybox in 2017 and it's a great example of our strategy in action, backing early stage companies with significant growth prospects and actively supporting them as they grow.
The Oxford Capital Growth EIS is an evergreen fund that offers investors the opportunity to invest in a portfolio of shares in early stage technology companies that have the potential to grow rapidly. A standard portfolio of 8-12 companies provides exposure to sectors in which the UK is a world leader such as artificial intelligence and machine learning, financial technologies and future of retail. We aim to invest in companies that are: • Run by credible, talented and highly driven entrepreneurs, founders and management teams • Solving commercial, technological and scientific problems in innovative ways • Businesses that have the potential to have a positive impact to the environment and on society We aim to fully invest each initial subscription within 12-18 months and exit most investments within 5-7 years.
oxcp.com/adviser 01865 860 760 investors@oxcp.com
managers IN FOCUS / eis COMPARISON TABLE
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managers IN FOCUS / eis showcase video content
OFFER presentation
Video content
showcase video content
6. What's on the Horizon?
what's in store after covid the brexit end game ots review what the managers say
what's in store after covid
WHAT'S ON THE HORIZON / what's in store after covid
The Government’s reaction to Covid 19 has seen it spend billions on various loans and schemes to support businesses and workers.
n his November Spending Review, Chancellor Rishi Sunak revealed that by the end of the year the UK Government will have borrowed almost £400 billion fighting Covid. This constitutes almost 19% of the UK’s national GDP. According to the Office of Budget Responsibility (OBR), UK borrowing has reached twice the level it hit in the 2008 financial crisis, the highest in British peacetime history. The OBR expects the economic fight against Covid 19 to push total UK net debt to well over 100% of GDP, and it expects it to continue rising until 2024/25, possibly breaking 120% in this time. After an Autumnal lull, a second Covid wave swept Europe, including the UK. The Government has not turned off the spending taps just yet, which suggests borrowing is set to continue into 2021.
Hard choices are ahead
An increase in capital gains tax: the OTS has recommended a number of changes to CGT (click here for the relevant chapter). Although this wouldn’t necessarily result in changes to EIS itself, it may improve the investment case for EIS. Changes to inheritance tax: This could go a number of ways. As EIS investments generally qualify for business relief, any increase in IHT would make EIS more appealing to investors. That said, a more root and branch review of IHT in general could see some of its exemptions (such as Business Relief) reduced or eliminated, which could obviously reduce the appeal of EIS. Changes to tax efficient investments: Similar to IHT, the Government could look at EIS in one of two ways:
• It may look to either cancel the relief, or prune some of its benefits - reducing the level of income tax relief, for example. Such a move would likely be counter productive. In the grand scheme of Government finances, EIS and SEIS are small fries - last year £2 billion was invested in EIS and SEIS combined. This compares to UK net debt of £2 trillion, and a deficit of almost £400 billion for the current year. • Alternatively, a number of experts have called on the Government to increase the tax perks available through EIS in order to generate increased growth. Alternative finance aggregator Nextfin, for example has called for a temporary rise in income tax relief to 50% for EIS investments and 70% for SEIS, as well as an increase of the SEIS investment allowance to £250,000 and £10 million for non KIC EIS. Back in March, the EISA called on the Government to increase the income tax relief up to 60% for both EIS and SEIS, and 5000 people have signed a petition from Vala going one stage further, calling on the Government to temporarily increase the income tax relief to 80%.
The Government has made clear that, at some stage, we are going to need to pay for the Covid-19 support schemes it launched. Already, it has cut Foreign Aid from 0.7% of UK GDP to 0.5%, and announced a freeze in pay for most public sector workers. However it won’t be until the next budget that we will see any changes to taxes. There are a number of ways the Government could look to reduce the deficit, but so far Sunak has kept his cards close to his chest. One option could be to try to grow GDP to reduce the debt to GDP ratio. However with the effects of Covid-19 and Brexit still hanging in the air, achieving the growth necessary to do so may take years. OBR figures show UK GDP shrank by 11% in 2020, however the UK economy is only expected to grow by 5.5% next year, and 6.6% the year after - in other words the UK economy is not expected to reach its pre-virus peak for another two years.
- Rishi Sunak
High as these costs are, the costs of inaction would have been far higher. But this situation is clearly unsustainable over the medium term. We could only act in the way we have because we came into this crisis with strong public finances. We have a responsibility, once the economy recovers, to return to a sustainable fiscal position. This is an economic emergency.
Therefore, some sort of tax increases may be likely in the near future. Sunak has kept tight-lipped in this regard, refusing to suggest where he might look to make up the numbers. This has led to speculation from commentators on where he might look. Some of these could affect the popularity of EIS:
As the UK Government’s Covid-19 emergency funding schemes begin to wind down, there is a real threat that UK start ups and SMEs could be starved of capital. EIS and SEIS are ideal solutions for this problem. While it may seem counterintuitive for the Government to increase certain reliefs while looking to bring in additional revenue elsewhere, such a move (even on a temporary basis) may help provide additional funding for these smaller companies, therefore generating growth the Government will realistically need to bounce back from Covid-19.
The UK is forecast to borrow a total of £394 billion this year, equivalent to 19% of GDP.
the brexit end game
WHAT'S ON THE HORIZON / The brexit end game
Before Covid-19, Brexit had dominated news headlines reasonably consistently ever since the 2016 referendum.
While Covid-19 has overtaken Brexit as the main talking point for much of 2020, the Brexit situation is actually close to reaching its end game, with the transition period set to end in 2021 and a longer term trade deal yet to be signed.
Brexit most obviously affects EIS around the potential end of EU state aid rules, which limit the amount of EIS or SEIS investment a company can receive, among other things. State aid remains one of the key sticking points in trade negotiations. Broadly speaking, the British side wish to have an independent say on their own state aid rules. Meanwhile the EU is concerned this would result in an uneven playing field, and therefore wish to bind the UK to the EU’s state aid rules in some way, including the use of EU courts as arbiters. At the time of writing, neither side has found a compromise on this position the other is happy with. Under the Withdrawal Agreement signed between the UK and the EU in 2019, EU State Aid Rules will continue to be applied in Northern Ireland in relation to goods (but not services) even after the end of the transition period, regardless of a trade deal being signed. Things are complicated by the UK Internal Markets Bill which, if it passes, will unilaterally give UK ministers the power to override elements of the Northern Ireland Protocol in the Withdrawal Agreement. Unsurprisingly, this move soured negotiations somewhat. All this has left the Brexit situation little clearer at the end of 2020 than it was in 2016, aside from the fact that Britain has now left the EU, and the transition period is due to end in 2020. What this means for EIS with regards to state aid rules and access to the EU markets remains just as unclear.
- boris johnson, 2017, Then Foreign Secretary
There is no plan for no deal because we are going to get a great deal."
A look at tax simplification
what's on the horizon? / ots review
We know that next year, the Chancellor is going to be looking to raise capital. The questions remains from where.
In November, the Office for Tax Simplification (OTS) released a review into Capital Gains Tax. This was requested by Chancellor Rishi Sunak back in June, and therefore it is likely he will be taking its recommendations seriously. Although the review was not directly on EIS, where it did touch upon it, it was supportive.
Tax rates in England and Wales
- Office for Tax Simplification, Capital Gains Tax review – first report: Simplifying by design, Nov 2020
Many respondents [to an online OTS survey] said that the Enterprise Investment Scheme also encourages repeated investment, which some described as ‘entrepreneurial activity’, especially through the Capital Gains Tax deferral relief it provides for those who have made a gain and want to re-invest.
There are a number of recommendations it makes that could impact the appeal of EIS:
Changes to rates and boundaries The OTS said its review found a range of areas where CGT is counter-intuitive, creates odd incentives, or creates opportunities for tax avoidance. In particular, it found significant issues around: • The rates at which the tax is charged; • The boundaries between income and gains arising from employment, business and entrepreneurial activity in different contexts; • How Capital Gains Tax applies to transfers before and after a person’s death • The strong interconnections between Capital Gains Tax, Income Tax and Inheritance Tax, which all have to be considered when changes are made One example of this is the disparity in rates between income tax rates and CGT rates. The OTS argues this disparity can distort business and family decision making to arrange affairs in ways that re-characterise income as capital gain. The OTS made a number of recommendations to challenge this. Key would be to bring closer alignment between the two rates - in other words raising CGT. As EIS allows for CGT deferral, and gains made in EIS investments are CGT free, such a move would increase the appeal of EIS. The slight issue here that the OTS points out is that higher CGT might cause business owners and shareholders to hold onto assets rather than sell. This could potentially increase the risk that EIS money gets trapped in an investment where the business owner does not want to incur a higher CGT charge, and therefore does not sell the company at an optimal time: Since sale of the business is one of the typical EIS exit routes. Although EIS investors and managers are at liberty to sell their shares when they choose, sometimes participating in the sale of an entire business to a third party can generate very attractive returns. What is more, it could end up hurting EIS gains when exits are made. A US study from May 2020 found a 1% increase in CGT rates would typically result in a reduction in realised gains of between 0.3% and 1%. To help make the system fairer, the OTS highlighted possible options open to the Government, including some form of inflation relief or increasing the flexibility with which capital losses can be used to offset income or capital gains.
Capital transfer at death EIS has a number of advantages for inheritance tax planning. Not only do investments qualify for Business Relief, but as it has CGT deferral, it is possible to roll forward the CGT on a continuous basis, until death, at which point the CGT disappears. The OTS suggests the way IHT and CGT interact at present is ‘incoherent’, as liabilities and reliefs of the two taxes are often viewed or developed without consideration on the effect of the other.
Example of current tax planning scenario
From a CGT perspective, assets inherited are treated at their market value at time of death. Any previous uplift is wiped out. This is known as the capital gains uplift. The OTS suggests as an alternative a ‘no gain no loss’ approach where the recipient is treated as acquiring the assets at the historic base cost of the person who has died, as demonstrated below:
OTS's recommendation for fairer system
As EIS investments generally have both IHT (through Business Relief qualification) and CGT relief, these changes would not directly affect them. However it might result in EIS becoming more valuable as a form of tax planning. If holding an asset no longer results in lower net tax, instead it might make more sense to sell the asset, then invest in BR qualifying investments that also qualify for EIS. Although this would still incur CGT (which would be deferred in the case of EIS), it would reduce any IHT liability to zero, so long as those investments were made at least two year prior to death. It’s worth remembering here that most EIS qualifying shares also qualify for Business Relief as the Business Relief qualification is much broader than that applies to EIS. However, by the same token, many Business Relief qualifying shares, may well not qualify for EIS. In addition, the risk profile of EIS would need to be carefully considered in terms of suitability for an older person looking to retain as much wealth as possible in an estate planning scenario.
sold in life -
£28,000
capital gains due
second home (bought for £100,000)
£200,000
asset retained
dies with
cash
£172,000
dies
inheritance tax due in cash
£68,800
inheritance tax due on asset
£68,800*
net beneficiary proceeds
£103,200
sold after death
*Assumes an adjustment for future tax liabilities
Source: OTS
£80,000
sold after death - no capital gains due
£120,000
second home bought for £100,000
Following the EISAs fee transparency initiative, do you think we'll see some convergence on fees?
With the ultimate aim of the initiative to enable investors to easily see and compare fees, it’s likely we’ll see more alignment across the industry. Blackfinch is already established as offering some of the best-value charges in the market. Our ability to adapt means we respond quickly to legislative changes. Transparency is also a cornerstone of our approach.
What challenges do you see ahead?
In a post-pandemic world, increased remote working is likely to shape several industries. No one can predict what form this might take but we know that the impact is likely to be considerable. Conversely, we expect new sub-sectors which have emerged to help enterprises prepare better for the impacts of a pandemic, to grow quickly.
Are you optimistic for 2021, and why?
Entrepreneurialism can flourish in hard times. Firms that have been able to adapt to the pandemic will emerge stronger, including those in our portfolio. We’re also excited about areas that are opening up such as FinTech start-ups innovating with Opening Banking, and AgriTech solutions. Both are responding to shifting consumer and economic demands. We’re looking for investment opportunities in all such areas.
Guinness have been a market leader in encouraging transparency and clarity of fees, and we were pleased to assist the EIS Association on this initiative.
The global pandemic of 2020 has hit world economies hard. The Government will face some unenviable choices in trying to support business while raising tax revenues. Growth companies have proved a real engine for driving employment and economic prosperity in the UK, and we will lobby hard for their support in the coming years.
We are excited to be supporting growth businesses in a time of such rapid change. We are seeing a lot of exciting opportunities at realistic valuations and because of our generalist approach we are ideally placed to capitalise on them. We also have a large portfolio of growth companies which provide us with some compelling follow-on investment opportunities.
There is a variety of ways that fees are charged for EIS portfolios and that can make comparison difficult. For our Octopus Ventures EIS Service we don’t charge the portfolio companies any fees, which ensures all fees are charged at the product level and clearly shown in the brochure and illustrations. To enable investors to claim EIS relief on as much of their investment as possible, we don’t set aside a pot to pay annual management charges upfront. Instead we only charge investors our annual management charge as each company is exited, and only then if it has grown in value. This also ensures we are completely aligned with our investors.
This is clearly a very unusual year, and at the outset we had no visibility on how much appetite there would be from investors looking to invest in smaller companies. However, we’ve found both through our VCTs and initial conversations about our new EIS service, that there’s a really strong base of investors and advisers who see investing in UK smaller companies as a good opportunity this year. There is also a desire from some to be part of the solution to economic recovery, by investing in exciting early stage companies.
We’re optimistic about the critical role UK early stage companies will play in driving the post-Covid economic recovery. We have steadily grown our specialist investment management teams to be able to support even more high potential companies with equity funding and strategic support at the point in their growth journey when it is needed most.
We’re in favour of the EISA transparency initiative, as this ultimately benefits all investors. However, we don’t see this initiative as a standardising feature for converging fees long term. In recent years, many new funds have applied management charges and fees in different ways to develop competitive advantages, and we welcome this innovation, providing that all disclosure is clear, fair and not misleading to investors.
The biggest challenge for every business now is achieving growth through a global pandemic – an environment which is completely alien to us all. However, we do have experience of previous recessions and can help founders navigate through the situation. We know that building an early stage company during a crisis can be really positive and provide opportunities for growth.
Yes, we’re really encouraged by how our portfolio companies have performed over the last 6 months and we’re looking forward to seeing what next year will bring. One trend that has emerged from the pandemic is that the pace of change has been really accelerated and that can only be a positive thing for early stage companies in the future.
We have always advocated the disclosure of fees charged to both the investor and investee company. However, as an industry we need to be careful that this does not create ‘a race to the bottom,’ with fees becoming a competitive element without further context. The age-old differentiation between cost and value is vitally important. Advisers and investors can only truly understand the value of a Manager, by understanding how they work with investees.
EIS has never been better understood and appreciated by financial advisers and investors and, therefore, the future of the Scheme and UK growth capital is rosy. The biggest challenge for the industry is all about quality, ensuring that quality managers are working with quality entrepreneurs and quality financial advisers continue to use EIS as part of their portfolios. That mix will ensure confidence from both investors and Government.
Working with entrepreneurs and growing businesses breeds optimism – if it doesn’t then you’re in the wrong business. The technology and life sciences companies we work with are solving some of humankind’s biggest problems and witnessing the development of these innovations, which are aiming to shape the world we live in, is inspiring and why we love what we do. Bring on 2021!
learning objectives cpd and feedback about intelligent partnership
7. Further learning
learning objectives
further learning / learning objectives
HOW DID YOU DO?
Covered in Section 2, in both the ‘Government support for SMEs’ and the Coronavirus continues to dominate headlines’ parts
Be able to benchmark products and providers in the market against one another
Covered in Section 5 using information and data provided by our partners
Recognise some of the benefits and drawbacks of Knowledge Intensive Funds
Covered in Section 4 looking at Knowledge Intensive Funds, including their pros and cons
Be aware of some of the key events likely to impact EIS in the near future
Covered in Section 6, looking at Brexit, possible tax changes and the world after Covid
Know the key fees and charges applied by EIS managers
Covered in Section 3 using data from the MICAP platform
Understand how Covid-19 has affected SMEs, and the main support measures the Government has put in place
CPD and feedback
further learning / cpd and feedback
Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
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eaders of the EIS Quarterly Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to obtain CPD and meet accreditation standards, readers must complete a short questionnaire and provide feedback on the report. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
about intelligent partnership
Intelligent Partnership is the UK’s leading provider of insights and education in the tax advantaged and alternative investments space.
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e provide a wide variety of ways in which we keep advisers and industry professionals up to date with the latest developments. Alongside our E-learning courses, we provide a range of engaging, accessible and CPD accredited resources as well as industry leading events. These include:
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